Drew owns and operates an onion packing plant. To help reduce costs on labor and to increase efficiency, Drew is considering purchasing an automatic 50 lb. bagging machine and a machine that automatically stacks the 50 lb. bags onto pallets. The cost of the two machines combined and their installation is $320,000. Drew will make a 20% down payment and finance the rest of the machinery with an amortized loan over 15 years at a 5.5% interest rate. Drew predicts that by using these two machines, his plant will be able to increase output, therefore increasing operating receipts by $40,000 per year. Also, this machinery will save him approximately $10,000 in labor costs each year by the increase in efficiency. However, other operating expenses such as electricity and insurance will increase by approximately $5,000 per year. Drew assumed a straight-line depreciation over 15 years and the life of the investment is 7 years. The terminal value is $170,000 after the 7 years, and Drew requires a pretax 10% rate of return to capital. The marginal tax rate over the next 10 years is 25%.

(i) What is the initial cost for the machine?

a.$64,000 b. $320,000

c.$240,000 d.$256,000

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(ii) What are the after-tax net returns?

a.$45,000 b.$35,000

c.$26,250 d.$33,750

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(iii) What are the tax savings from depreciation?

a.$21,333.33 b.$5,333.33

c.$15,000 d.$5,000

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(iv) What is the after-tax terminal value?

a.$170,000 b.$170,666.67

c.$170,166.67 d.$175,000

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(v) What is the appropriate discount rate to calculate the NPV given the above information?

a.10% b.25%

c.5.5% d.7.5%

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(vi) What is the net present value?

a.$33,750 b.($28,999.10)

c.$(10,422.37) d.$10,000

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(vii) What is the least additional operating receipts that can be earned from the new machine and still be a good investment?

a. $34,630 b. $42,594

c. $47,506 d. $45,695

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